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Author: John P. Harding Publisher: ISBN: Category : Languages : en Pages :
Book Description
I develop a rational mortgage valuation model and use the model to estimate parameters describing borrower mobility. The valuation model extends previous work in two ways. First, I calculate the prepayment boundary by solving for the borrower's optimal prepayment strategy over the expected tenure in the house. This optimal strategy is significantly different from the strategy traditionally used in rational mortgage valuation and the resulting mortgage values are higher than values calculated using the traditional approach. Second, I use borrower heterogeneity in terms of expected tenure in the house to overcome two problems typically associated with rational models: all-or-nothing prepayment and a low upper limit on calculated mortgage values. I use the resulting model and observed prepayments to estimate the distribution of expected tenure of borrowers who chose a long-term, fixed-rate mortgage. The empirical results indicate that the average mobility of the group of borrowers choosing fixed-rate loans has declined since the introduction of adjustable-rate mortgages.
Author: John P. Harding Publisher: ISBN: Category : Languages : en Pages :
Book Description
I develop a rational mortgage valuation model and use the model to estimate parameters describing borrower mobility. The valuation model extends previous work in two ways. First, I calculate the prepayment boundary by solving for the borrower's optimal prepayment strategy over the expected tenure in the house. This optimal strategy is significantly different from the strategy traditionally used in rational mortgage valuation and the resulting mortgage values are higher than values calculated using the traditional approach. Second, I use borrower heterogeneity in terms of expected tenure in the house to overcome two problems typically associated with rational models: all-or-nothing prepayment and a low upper limit on calculated mortgage values. I use the resulting model and observed prepayments to estimate the distribution of expected tenure of borrowers who chose a long-term, fixed-rate mortgage. The empirical results indicate that the average mobility of the group of borrowers choosing fixed-rate loans has declined since the introduction of adjustable-rate mortgages.
Author: Andrew Davidson Publisher: Oxford University Press ISBN: 0199363684 Category : Business & Economics Languages : en Pages : 465
Book Description
Mortgage-backed securities (MBS) are among the most complex of all financial instruments. Analysis of MBS requires blending empirical analysis of borrower behavior with the mathematical modeling of interest rates and home prices. Over the past 25 years, Andrew Davidson and Alexander Levin have been at the leading edge of MBS valuation and risk analysis. Mortgage Valuation Models: Embedded Options, Risk, and Uncertainty contains a detailed description of the sophisticated theories and advanced methods that the authors employ in real-world analyses of mortgage-backed securities. Issues such as complexity, borrower options, uncertainty, and model risk play a central role in the authors' approach to the valuation of MBS. The coverage spans the range of mortgage products from loans and TBA (to-be-announced) pass-through securities to subordinate tranches of subprime-mortgage securitizations. With reference to the classical CAPM and APT, the book advocates extending the concept of risk-neutrality to modeling home prices and borrower options, well beyond interest rates. It describes valuation methods for both agency and non-agency MBS including pricing new loans; approaches to prudent risk measurement, ranking, and decomposition; and methods for modeling prepayments and defaults of borrowers. The authors also reveal quantitative causes of the 2007-09 financial crisis and provide insight into the future of the U.S. housing finance system and mortgage modeling as this field continues to evolve. This book will serve as a foundation for the future development of models for mortgage-backed securities.
Author: Francis A. Longstaff Publisher: ISBN: Category : Mortgage loans Languages : en Pages : 28
Book Description
We study the optimal recursive refinancing problem where a borrower minimizes his lifetime mortgage costs by repeatedly refinancing when rates drop sufficiently. Key factors affecting the optimal decision are the cost of refinancing and the possibility that the mortgagor may have to refinance at a premium rate because of his credit. The optimal recursive strategy often results in prepayment being delayed significantly relative to traditional models. Furthermore, mortgage values can exceed par by much more than the cost of refinancing. Applying the recursive model to an extensive sample of mortgage-backed security prices, we find that the implied credit spreads that match these prices closely parallel borrowers' actual spreads at the origination of the mortgage. These results suggest that optimal recursive models may provide a promising alternative to the reduced-form prepayment models widely used in practice.
Author: Richard Stanton Publisher: ISBN: Category : Languages : en Pages :
Book Description
This article presents a new model of mortgage prepayments, based on rational decisions by mortgage holders. These mortgage holders face heterogeneous transaction costs, which are explicitly modeled. The model is estimated using a version of Hansen's (1982) generalized method of moments, and shown to capture many of the empirical features of mortgage prepayment. Estimation results indicate that mortgage holders act as though they face transaction costs that far exceed the explicit costs usually incurred on refinancing. They also wait an average of more than a year before refinancing, even when it is optimal to do so. The model fits observed prepayment behavior as well as the recent empirical model of Schwartz and Torous (1989) Implications for pricing mortgage-backed securities are discussed.
Author: Yanli Cheng Publisher: ISBN: Category : Languages : en Pages :
Book Description
While option-theoretic models are widely used in valuation of other fixed-income instruments, their applications for the valuation of mortgage-backed securities face challenges. Mortgages are explicitly written with a call option, which allows mortgagors to prepay their mortgages any time before the maturity. The magnitude and timing of exercising the prepayment options are not purely driven by economic factors, but also the mortgagor's individual preferences and personal behaviours. This brings difficulties to valuing mortgage-backed securities with conventional models. In this thesis we aim to explore the prepayment risk caused uncertainties in valuation of mortgage-backed securities. We start with empirically examining an option-theoretic model proposed by Kalotay, Yang and Fabozzi (2004). This model has special features to treat borrower heterogeneity and suboptimal exercises of the prepayment options. Based on the empirical results, we propose to employ linear prepayment functions to model borrower heterogeneity. The new MBS valuation model with the integration of linear prepayment functions is also tested with empirical data. Our results suggest that mortgages with different coupon rates have different refinancing tendencies even towards the same market rate change. Therefore, assuming the same refinancing pattern to all classes of mortgages may lead to errors in pricing mortgages and MBSs. For mortgages with coupon rate below the prevailing refinancing rate (as proxied by the 30 year libor rate) plus the refinancing cost, a prepayment function with a low initial prepayment rate and a high slope will model the prepayments best. On the other hand, for mortgages with coupon rate above the current refinancing rate plus the refinancing cost, a prepayment function with a high initial prepayment and a mild slope will perform best. Meanwhile, refinancing burnout is also an important factor in modelling mortgage prepayment. Our results suggest that when the underlying mortgages are seasoned mortgages, especially when the prepayment option has been deep-in-the-money for a long time, the low initial prepayment high slope function will model their prepayments the best. Once these different refinancing tendencies are factored in the modelling of mortgage prepayment, the accuracy of the MBS valuation model is greatly improved.
Author: G. Constantinides Publisher: Elsevier ISBN: 9780444513632 Category : Business & Economics Languages : en Pages : 698
Book Description
Arbitrage, State Prices and Portfolio Theory / Philip h. Dybvig and Stephen a. Ross / - Intertemporal Asset Pricing Theory / Darrell Duffle / - Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance / Wayne E. Ferson / - Consumption-Based Asset Pricing / John y Campbell / - The Equity Premium in Retrospect / Rainish Mehra and Edward c. Prescott / - Anomalies and Market Efficiency / William Schwert / - Are Financial Assets Priced Locally or Globally? / G. Andrew Karolyi and Rene M. Stuli / - Microstructure and Asset Pricing / David Easley and Maureen O'hara / - A Survey of Behavioral Finance / Nicholas Barberis and Richard Thaler / - Derivatives / Robert E. Whaley / - Fixed-Income Pricing / Qiang Dai and Kenneth J. Singleton.
Author: Thomas Sowell Publisher: Basic Books (AZ) ISBN: 0465018807 Category : Business & Economics Languages : en Pages : 194
Book Description
Explains how we got into the current economic disaster that developed out of the economics and politics of the housing boom and bust. The "creative" financing of home mortgages and "creative" marketing of financial securities based on these mortgages to countries around the world, are part of the story of how a financial house of cards was built up--and then collapsed.
Author: Callum Jones Publisher: International Monetary Fund ISBN: 1484374983 Category : Business & Economics Languages : en Pages : 51
Book Description
We evaluate and partially challenge the ‘household leverage’ view of the Great Recession. In the data, employment and consumption declined more in states where household debt declined more. We study a model where liquidity constraints amplify the response of consumption and employment to changes in debt. We estimate the model with Bayesian methods combining state and aggregate data. Changes in household credit limits explain 40 percent of the differential rise and fall of employment across states, but a small fraction of the aggregate employment decline in 2008-2010. Nevertheless, since household deleveraging was gradual, credit shocks greatly slowed the recovery.
Author: John P. Harding
Author: John P. Harding
Author: John Patrick Harding
Author: Andrew Davidson
Author: 
Author: Francis A. Longstaff
Author: Richard Stanton
Author: Yanli Cheng
Author: G. Constantinides
Author: Thomas Sowell
Author: Callum Jones